Mandatory Clawbacks are on the Way—A Checklist of Items to Consider
Section 954 of the Dodd-Frank Act requires the SEC to direct national securities exchanges to prohibit the listing of public companies that, among other things, do not develop and implement a policy providing for the recovery of erroneously paid incentive-based compensation following a required accounting restatement. While the SEC has not issued rules implementing Section 954 of the Dodd-Frank Act, public companies may wish to consider the impact on compensation programs under development and otherwise be prepared to consider variables when final rules are adopted. A short checklist of items to consider is set forth below:
Current Proxy Season Disclosure. Public companies that currently have clawback policies will want to continue to disclose those policies in their CD&As. Our review of many recently filed proxy statements indicates that issuers which currently do not have clawback policies generally are not disclosing the Dodd-Frank requirement to adopt policies in the future in their proxy statements.
Inventory. Create an inventory of current plans that have a clawback policy to determine which plans may have to be modified to comply with the eventual rules. Also create an inventory of plans which are likely to include “incentive-based compensation” that may eventually need to be subject to a clawback policy.
Depth. How deep into the organization should the clawback policy extend? Section 954 refers to “current and former executive officers,” which are terms yet to be defined. Issuers with current policies that extend deeper than required may want to consider the administrative complexities of implementing a new policy that is broader than required. On the other side of the coin is the question of fairness and cutting off compensation recovery at a level artificially set by Congress and the SEC.
Triggers. Section 954 of the Dodd-Frank Act requires recoupment upon a requirement to prepare an accounting restatement due to any material noncompliance of the issuer with any financial reporting requirement under the securities laws. The statutory mandate appears to apply without fault, contrary to some existing clawback policies. Many existing clawback policies also require recoupment for other events such as materially disruptive activities or ethical or criminal violations. When amending or implementing clawback policies companies may want to consider appropriate triggers.
Recovery. What actions can the issuer take to recoup the clawed-back compensation? Some current plans permit offset against other benefit plans, future payments of incentive compensation, cancellation of existing option grants, withholding of future equity awards and the like.
Sarbanes-Oxley Double Counting. Section 304 of Sarbanes-Oxley Act also requires forfeiture by the CEO and CFO of certain incentive compensation in similar, but different circumstances than the Dodd-Frank Act. To the extent permissible under the Dodd-Frank rules, clawback policies which are developed should prevent any double counting of clawbacks under Dodd-Frank and Sarbanes-Oxley. Some plans we have reviewed describe the clawback as being “in addition to” the Sarbanes-Oxley requirements which could be an incorrect choice of words.
Board Discretion. Section 954 of the Dodd-Frank Act does not appear to permit any discretion on whether to enforce a clawback. However, consistent with many plans adopted to date, the board or compensation committee should have discretion on whether to pursue a clawback to the extent a policy broader than required by the Dodd-Frank Act is adopted.
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Contact Steve Quinlivan for more information.